Class summary 12/5

Picture about supply of illegal and initial thing:

There is additional cost other than marginal cost that you need to pay to protect yourself from being caught.

Illegal things’ prices are higher

Cost: you have to spend money on court, police…to penalize bad people from selling drugs

Prohibition actually does lower other costs

Countries has stronger enforcement on drug selling has more violent crimes.

When you start enforcing the drug, it actually low the cost of violence, murder.

The Economic Incidence of Supply-Demand Changes: an application

Tax is neither a cost or benefit

Taxation has some problem with the way it’s collected

Excise Tax: tax on sellers

Initial EQ

P=$3.00

Q=3million

Tax on sellers, (legal incidence of the tax), increase the cost of seller by 1 dollor

The new equilibrium Q=2.75millionl

Tax incidence

                                              Buyers                              Sellers

Initial P            3.00            3.00

Final P            3.75            3.75            2.75

(at the register)

Taxes            ---                                                 -1.00

Economic Burden             0.75            0.25